Fund manager's comment/Prakash Rajasekaran
We expected to see a wave of profit warnings during the second quarter reporting season and we have not been let down. But the sheer size of some of the warnings has shocked investors.
Figures from JDS Uniphase, the world's biggest optical components maker, stunned the sector. It lost $50bn in the year to June 30, a loss believed to be the biggest in corporate history. It has also announced it is to shed 7,000 jobs and follows profit warnings from the likes of Nortel and Lucent Technologies.
But while we expected the bad news, we had hoped the profit warnings would come with a reassurance that the technology sector had bottomed. That has not been the case and confidence is still low. Visibility is also poor and the focus is on the very short term. Thankfully, several firms have given investors a glimmer of hope. Microsoft delivered strong figures with revenues beating Wall Street expectations despite weakening demand for PCs.
We still like Israeli internet security company Checkpoint Software. It is one of the world's most profitable dot.coms and bucked the trend last year by beating expectations. It may have downgraded growth forecasts from 50% to 30%, but that still equates to strong growth. The media sector also offers some attractive opportunities. Stocks we like include Viacom, which owns Blockbuster Video, the Paramount Channel and MTV. Stocks such as Clear Channel, a diversified media firm with operations in broadcasting and the world's biggest outdoor media group, will benefit if advertising demand picks up towards the year end.
The US economy is obviously crucial to the sector. It is the main driver for technology stocks (two-thirds of the global technology fund is invested in the US). The good news is that so far, consumer confidence has held up, but if unemployment numbers continue to rise, it could be dampened. We will have to wait and see if the many rate cuts have the desired affect, but a full-blown recession has been avoided so far.
Valuations across the sector are not that cheap as the hope of a recovery has been priced in, but they still look reasonable on a three- to five-year view.
Investors should hang on. It is going to be volatile, but there are a number of large, well-known companies that are in pole position in their chosen fields and have decent balance sheets. The rationale for investing in technology, media and telecoms is the same as it has always been.
In the short-term, however, forthcoming results from firms such as Cisco will be crucial to confidence. We expect numbers to be in line with expectations, but if they indicate that the sector has bottomed, it could give it a timely boost. We are already hearing that Cisco is telling its suppliers to ramp up production ' hopefully a sign of better things to come.
Prakash Rajasekaran is a fund manager at Jupiter Asset Management
• Indications of a bottoming out.
• Advertising levels may rise.
• Valuations reasonable on three-year view.
• There is a lack of visibility.
• Consumer confidence decline in the US.
• Interest rate cuts fail to hit the market.
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